The Iraqi government has ordered the American private security contractor Blackwater, which provides protection for US officials in the country, to shut down its operations after its guards were accused of killing 10 civilians and injuring 13 others in Baghdad.

Employees of the company are alleged to have opened fire indiscriminately after a bomb exploded on Sunday in the Mansour district of the city, packed with people shopping for Ramadan.

The Iraqi government's decision, personally endorsed by the Prime Minister Nouri al-Maliki, is the strongest measure taken yet against private security contractors, who have been repeatedly accused of carrying out unprovoked shootings of Iraqi civilians.

Yesterday, in an extraordinary telephone news conference, the US embassy spokeswoman could not answer whether the company was still working for the Americans inside the Green Zone, or what its legal position was along with similar foreign contractors within Iraq.

The shooting started after a car bomb blast killed two soldiers and lasted for more than 20 minutes, with civilians seeking safety in stores and behind cars. Afterwards the Blackwater convoy roared away from the scene, shoving cars out of their way with their armoured four-wheel-drive sports utility vehicles (SUVs).

Initially, the US embassy said the contractors, who were providing security for State Department officials at a meeting, had reacted after coming under small arms fire. Later, however, it said they had "reacted to the bombing".

The Independent, which was present in Mansour at the time of the bombing and shooting, spoke to Iraqis caught up in the incident who described foreigners dressed in civilian uniforms opening fire without warning from their vehicles at cars and people in the street.

The cancellation of Blackwater's contract to work in Iraq was announced by Jawad al-Bolani, the Minister of Interior. Brigadier General Abdul-Karim Khalaf, a ministry spokesman, said: "The security contractors opened fire randomly on civilians. We consider this act a crime. The investigation is ongoing, and all those responsible for Sunday's killing will be referred to Iraqi justice. We have issued an order to cancel Blackwater's licence and the company is prohibited from operating anywhere in Iraq." Mr Maliki said he unreservedly condemned the "criminal operation" in Mansour and that the security company would be "punished" by having its operations shut down. The Iraqi government ordered all Blackwater employees in the country to leave, apart from those involved in the Mansour shooting who were asked to be kept behind for questioning by the police.

The company has an army of 20,000 worldwide and its own private air force. Four of its contractors were lynched in the town of Falluja in March 2004. Its employees have subsequently faced criticisms over killings of Iraqis including the shooting of a bodyguard of the Vice-President Adil Abdul-Mahd by a Blackwater employee who was said to be drunk, and who was subsequently flown out of the country by his employers before being arrested by Iraqi authorities.

However, the company has been praised by the US ambassador to Baghdad, Ryan Crocker, and the US commander in Iraq, General David Petraeus.

Yesterday, a spokeswoman for the US embassy said: "We take the deaths very seriously indeed. There are many issues to be addressed. We are carrying out our own investigation and we shall co-operate fully with the Iraqi authorities." Asked whether the contract with Blackwater would be reviewed, she said: "This is something we will need to review along with other matters."

Ahmed Ali Rahim, a shopkeeper, who witnessed the Mansour shooting, said: "There have been many such shootings in the past, and no one has ever been punished. This time they just opened fire, I do not know why. There was an explosion near the mosque and everyone became afraid, they were screaming and running. Then we saw these SUVs with foreigners leaning out and firing. I just lay down on the ground until it was over. One young man near me was shot in the leg and he was bleeding."

Muhammed Hussein, whose brother was killed in the shooting, said: "My brother was driving and we saw a black convoy ahead of us. Then I saw my brother suddenly slump in the car. I dragged him out of the car and saw he had been shot in the chest. I tried to hide us both from the firing, but then I realised he was already dead."

Lieutenant Mohammed Khamis, a traffic policeman, heard the bomb go off and saw a building damaged. "It was the National Guard [army] post, people were injured and killed. Then the shooting started and people began to run. The US army came later on and searched some cars. I do not know what happened to the other foreigners in the convoy."

Immune from prosecution?

Private security companies in Iraq have often been accused of being responsible for unprovoked attacks on Iraqis and there is a widely held perception that they are immune from prosecution. In one case the supervisor of a US company said he was "going to kill somebody today" and then shot at Iraqi civilians for amusement, possibly killing one, according to two employees. The company, Triple Canopy, fired the two men who brought an action for unfair dismissal but lost on what was described as " technical grounds". However the jury forewoman accused the company of "poor conduct, lack of standard reporting procedure, bad investigation methods and double standards".

Employees of Aegis Defence Services, based in London and run by the former Scots Guards officer Lt-Col Tim Spicer, left, posted footage on the internet showing company guards firing automatic weapons at civilians. The company later issued a statement saying the shootings were legal within rules of protocol established by the now-defunct Coalition Provisional Authority in Iraq.

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